A Simple Estimation of Bid-Ask Spreads from Daily Close, High, and Low Prices

By Farshid Abdi, Angelo Ranaldo. 2017

274 citations recorded by the source corpus.

To estimate the bid-ask spread, we propose a new method that resembles the Roll measure (1984) but has some key advantages: it is fully independent of bid-ask bounces and benefits from a wider information set, namely, close, high, and low prices, which are readily available. Assessed against other low-frequency estimates, our estimator generally provides the highest cross-sectional and average time-series correlations with the TAQ effective spread benchmark. Moreover, it delivers the most accurate estimates for less liquid stocks. Finally, our estimator improves the measurement of systematic liquidity risk and commonality in liquidity for individual stocks and sorted portfolios.

Subfields: Economics and Econometrics, Finance, Marketing

View Paper: https://www.semanticscholar.org/paper/c5c5dce36de5bfeee92d51bee22986078ef79ae4